Estate planning is the process through which individuals devise a plan for the distribution of their assets upon their passing. These assets can vary widely from person-to-person,and can encompass numerous asset types. Bank accounts, stocks and bonds, real estate, personal possessions and even intellectual property can be addressed in an estate plan. Yet, while creating an estate plan or when a loved one passes away, individuals are often left wondering how debts are handled after death.
Generally speaking, debts are not inherited. Therefore, when an individual passes away, his or her loved ones, even if named in estate planning documents, are not on the hook for repayment of debts. There are, of course certain exceptions, such as when a loved one co-signs on a loan. Therefore, any jointly held credit cards, mortgages and car loans may still need to be repaid by the living individual.
Although relatives may not be responsible for repaying debt held by their deceased loved ones, those debts will still need to be repaid as fully as possible. This means that assets are taken from the estate to pay creditors. This is a duty carried out by the estate administrator. These debts can take a significant bite into an existing estate, though, thereby leaving beneficiaries and heirs with less than what a deceased individual may have intended.
The severity of the impact made by debt can be limited, though, through effective estate planning. Certain types of trusts can render assets untouchable by creditors, but they must be created and managed carefully. We will talk more about these options in upcoming blogs. In the meantime, if you have questions or concerns about your estate, please consider reaching out to a law firm that is well-versed in handling these matters.